Vodafone Tax Case

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The most famous Vodafone Tax Case, explained in easy manner by Rohit Jain.
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Vodafone Tax Case

  1. 1. Vodafone Tax Case - By Rohit Jain iRohit@live.in www.iRohitJain.BlogSpot.Com
  2. 2. The tax dispute between ; and in connection with taxability of the $ 11.2 billion is one of the biggest controversies in Indian history. The quantum of tax demand by the Indian Revenue Authorities in this particular case was around www.iRohitJain.BlogSpot.Com
  3. 3. – A merger involves the mutual decision of two companies to combine and become one entity. Eg. A + B = AB – Acquisition is purchase of one company by another in which no new company is formed. Eg. A + B = A • Merger is like two persons getting married. • Acquisition is like an animal eats any other. www.iRohitJain.BlogSpot.Com
  4. 4. A tax heaven is a Wikipedia state, country or territory where certain taxes are levied at a low rates or not at all. • • • • • Switzerland Cayman Islands Luxembourg Hong Kong USA • • • • • Singapore Jersey Japan Germany Bahrain www.iRohitJain.BlogSpot.Com TheRichest.Com
  5. 5. www.iRohitJain.BlogSpot.Com
  6. 6. Sold 100% holding of CGP to VIH HTIL VIH CGP HEL Vodafone Essar Limited VEL www.iRohitJain.BlogSpot.Com turned to
  7. 7. CGP is a dummy company CGP is situated in Cayman Islands, which is a tax heaven. VIH wanted to acquire HEL. To save Tax, VIH opted to acquire CGP, holding Company of HEL. Now VIH is neither liable to pay tax - in India because they have made no transaction in India nor - in Mauritius because it’s a tax heaven. Conclusion: Vodafone acquires Hutch in India with Nil Tax Liability. www.iRohitJain.BlogSpot.Com
  8. 8. Indian Revenue Authorities’ Opinion CGP was created to take benefits of Tax Exemption. Concept of Substance Over Form Transaction was to transfer Rights in The Indian Revenue Authorities alleged that to HEL VEL VIH, had failed to Deduct Tax on the payment of Hence, sought to assess tax in its hand consideration made to as a taxpayer in default and it issued a HTIL. notice to Vodafone. www.iRohitJain.BlogSpot.Com
  9. 9. Vodafone petition to HC and SC Instead of responding to the Notice of Indian Revenue Authorities, VIH filed a writ petition to the Honourable Bombay High Court challenging jurisdiction of Income Tax Department. December 2008 The Honourable Bombay High Court upheld the matter in favour of Indian Revenue Authorities. VIH filed Special Leave Petition (SLP) before the Honourable Supreme Court of India. The Supreme Court disposed the case with a direction to Tax Authorities to decide the preliminary issue of jurisdiction. January 2009 www.iRohitJain.BlogSpot.Com
  10. 10. DecisionbyIndianTaxAuthorities and HC CGP was a mere holding company and was not engaged into any business in Cayman Islands, thus, the situs of shares existed where the “underlying assets” i.e. in India. Further, HTIL had extinguished its right of control over HEL and extinguishment of “Rights and Entitlements” constituted as “Capital Assets”. After going through the terms of Share Purchase Agreement and other documents, it can be interpreted that the intention of the parties was ultimately to transfer the controlling interest in HEL which was situated in India. The Tax Authorities passed an order under section 201 holding that they had jurisdiction to proceed against Vodafone for failure to deduct tax. www.iRohitJain.BlogSpot.Com May 2010
  11. 11. Vodafone Petition to HC and SC (II) Vodafone filed a writ petition to the Bombay High Court challenging the order of Income Tax Authorities. September 2010 The Bombay High Court dismissed Vodafone’s writ petition against the order of the Tax Authorities. Vodafone filed Special Leave Petition (SLP) before the Honourable Supreme Court of India. The Supreme Court admitted the SLP and directed Vodafone to deposit Rs. 2,500 crore and provide a bank guarantee for the balance Rs. 8,500 crore. November 2010 www.iRohitJain.BlogSpot.Com
  12. 12. The Supreme Court’s Decision The Indian Revenue Authorities had no jurisdiction to tax the foreign transactions, as sale of shares was in Cayman Island. Transfer of shares in CGP doesn’t amount to transfer of Capital Asset situated in India, as per Section 9(1)(i). The transfer of “Rights and Entitlements” (Controlling Interest) is not covered in Definition of “Capital Assets” under section 2(14). As Capital Asset is not taxable in India, so there is no question of Deducting Tax at Source under section 195(1). The Supreme Court reversed the decision of Bombay High Court. www.iRohitJain.BlogSpot.Com January 2012
  13. 13. Retrospective Amendments in Tax Law Certain Retrospective Amendments were made in Tax Law by Finance Act 2012 to nullify the judgment of the Supreme Court. Section 9(1)(i) Income Deemed to Accrued or arise in India Section 2(14) Section 2(47) Definition of Capital Assets Definition of Transfer www.iRohitJain.BlogSpot.Com
  14. 14. SECTION 9(1)(i) Applicable w.e.f April 1, 1961 All incomes accrued or arise, whether directly or indirectly through transfer of a “Capital Asset” situated in India. Co-relate with case Explanation for Capital Assets: A Capital Asset being any share in any Entity (whether registered outside India) deemed to be situated in India, Shares of CGP were registered outside India. if the share derives its value substantially from the asset located in India. But the shares derive its value substantially from the asset located in India. www.iRohitJain.BlogSpot.Com
  15. 15. Explanation to SECTION 2(14) Applicable w.e.f April 1, 1961 Co-relate with case Explanation to Section 2(14): “Property” includes and shall be deemed to have always included: - Any rights in Indian Company - Any rights in relation to an Indian Company www.iRohitJain.BlogSpot.Com HTIL have rights in Indian Co. (HEL)
  16. 16. Explanation to SECTION 2(47) Applicable w.e.f April 1, 1961 Explanation to Section 2(47): “Transfers” includes and shall be deemed to have always included: - Disposing of or parting with an asset or any interest therein - Creating any interest in any asset in any manner whether indirectly or otherwise - By way of an agreement (whether entered into in India or outside India) or otherwise - Notwithstanding that such transfer of rights have been characterized as being effected or dependent upon or flowing from the transfer of share of a company registered or incorporated outside India. www.iRohitJain.BlogSpot.Com HTIL transferred rights in Indian Co. to Vodafone, indirectly Vodafone created interest in asset in India By way of an agreement entered outside India Co-relate with case
  17. 17. The Second Phase of Dispute is about to start. Prepared byRohit Jain (CA-Final) iRohit@live.in www.irohitjain.blogspot.com www.iRohitJain.BlogSpot.Com
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